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The pause that could boost your pension by thousands

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07/04/2021
Deferring taking your state pension by as little as 12 months could mean you enjoy a substantially higher income in retirement.

That’s the conclusion of new analysis from AJ Bell, which highlighted that putting off receiving the state pension until you really need it can result in a much more comfortable retirement.

However, while deferment can prove financially sensible, it won’t be a smart move for everyone.

Why will deferring boost my pension?

You can start receiving your state pension when you reach a specific age. At the moment the state pension age is set at 66, but it is due to increase to 67 and then 68 in the years ahead.

Crucially, you don’t have to start taking your state pension when you reach that age. And by deferring, you can actually boost the eventual value of your payments.

And if you opt to put off receiving your state pension, the government will boost the size of your payments when you do start receiving them.

If you reach state pension age on or after 6 April 2016, then you get a boost of 1% for every nine weeks you defer, which works out at around 5.8% a year. 

And that additional payment can quickly add up.

Enjoying thousands more in retirement

AJ Bell has crunched the numbers to see just how beneficial deferring can be. 

Based on the current state pension, that 5.8% increase is worth around £10.41 per week to someone entitled to the full state pension at the moment.

If the state pension grows by 2.5% a year ‒ which is the minimum increase possible thanks to the pension triple lock rules ‒ then according to AJ Bell it would take around 15 years for the total retirement income you receive to surpass what you would have got if you started taking the state pension from the moment you were eligible.

And from this point onwards, you start really accruing the benefits. The calculations found that if you lived until 90, having deferred your state pension by 12 months, you would enjoy a massive £7,000 more from your pension income.

The table below breaks down just how big a difference that income can be, based on a 12-month deferral. 

  Age      
Total retirement income 70 80 90 100
State pension deferred 12 months £31,150 £153,341 £309,756 £509,980
State pension taken at age 66 £38,781 £154,274 £302,114 £491,362

The pros and cons of deferral

Life expectancy is continuing to grow. According to the most recent data from the ONS, the average life expectancy for a man aged 66 is a further 19 years, while women can expect to live another 21 years.

As a result, you may be planning to put off your actual retirement and so don’t need the income provided by the state pension as you already have your regular salary to rely on. Alternatively you may have other incomes in retirement, for example from your investments, that you can rely on initially.

Tom Selby, senior analyst at AJ Bell, explains: “If you are in good health and have enough income to support your lifestyle in retirement then deferring receipt of the state pension could be a savvy move.”

However, it’s worth remembering that deferring will not be a great idea for everyone. Some will need the money as soon as possible, and so won’t be in a position to hold off in order to receive more cash years down the line.

Similarly, those with underlying health conditions may not live long enough to enjoy the benefit of those higher state pension payments.

Selby adds: “People also need to consider how a higher state pension payment might interact with other means-tested benefits they are currently entitled to.”

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